The recent Federal Court decision in ASIC v Auto & General Insurance Company Limited [2024] FCA 272 is the first decision to apply the unfair contract terms (UCT) regime in the context of insurance since its expansion to insurance policies on 5 April 2021. On 22 March 2024, Jackman J delivered a judgment in favour of Auto & General Insurance Company Ltd (Auto & General), holding that a term requiring policyholders to disclose any changes to their home and contents is not unfair. The judgment also considers the interaction between the UCT regime and the Insurance Contracts Act 1984 (Cth) (ICA).

ASIC’s claim: a first of its kind

ASIC commenced its first ever action against an insurer in relation to an unfair contract term when it filed proceedings against Auto & General on 4 April 2023 in respect of a term within its standard form home and contents insurance policies.

Between 5 April 2021 and 4 May 2023, Auto & General entered into approximately 1,377,900 contracts for home and contents insurance.[1] Customers were issued with a Product Disclosure Statement (PDS) which stated that insureds must “tell us if anything changes while you’re insured with us” (the Notification Clause) (our emphasis).[2]

ASIC submitted the Notification Clause was unfair within the meaning of ss 12BF(1)(a) and 12BG(1) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Jackman J noted that because the language of these provisions is substantially identical to ss 23 and 24 of Schedule 2 to the Competition and Consumer Act 2010 (Cth), being the Australian Consumer Law (the ACL), decisions relating to those provisions under the ACL were directly relevant to the UCT regime under the ASIC Act.[3]

ASIC alleged the Notification Clause was unfair because:

  1. the obligation to notify Auto & General if ‘anything’ changes about their home or contents imposed an unclear disclosure obligation on the insured;
  2. it suggested that Auto & General had a right to refuse claims or reduce the amount payable under claims more broadly than permitted under the ICA if the insured failed to comply with the notification requirement; and
  3. the broad and unclear term was liable to mislead or confuse the insureds as to their true rights and obligations under the contract, including their right to cancel the policy.

Was Auto & General’s notification request unfair?

The meaning of ‘unfair’

The statutory criteria of unfairness, as expressed within s 12BG(2), requires that the clause:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment to a party if it were to be applied or relied on.

In considering the criteria, Jackman J noted the Court must take into account the ‘transparency’ of the term, per s 12BG(2)(b), in addition to the contract as a whole, per s 12BG(2)(c), in interpreting unfairness.

Relevance of the ICA provisions

Jackman J ultimately found in favour of Auto & General on the basis ASIC could not discharge its burden of satisfying all three criteria in s 12BG(1). His Honour highlighted that “when assessing the three criteria of unfairness in s 12BG(1), the Court must take into account the context of the overall legal environment (including statutory provisions like s 13 of the ICA) in which the terms of the contract operate.”[4] Therefore, the inquiry under the UCT regime necessitated an interaction with terms of the ICA, specifically s 54, which precludes an insurer from refusing to pay a claim based on certain acts and omissions of the insured, and the duty of utmost good faith under s 13.

Consistent with the standards of common decency and fairness, Jackman J held that the proper construction of the Notification Clause only required the insured to notify Auto & General of any change to the information about the insured’s home or contents that was disclosed to Auto & General prior to entry into the contract. Accordingly, Auto & General could not rely on a literal meaning of “anything” which would lead to absurdity by requiring the notification of “routine and everyday changes.”[5]

Upon an insured’s failure to disclose relevant changes, Auto & General could exercise its right to refuse to pay the claim, reduce the amount it paid, cancel the contract or take away the right to renew the contract. Jackman J considered that this construction was consistent with the principles of s 54, which protects insureds by limiting the insurer’s exercise of rights and powers under the contract for failure to comply with a policy condition.

On this construction, Auto & General’s rights to refuse payment or reduce a claim were qualified by the implied requirement under s 13 that it must exercise its rights and powers with utmost good faith. This meant that Auto & General could not exercise its rights opportunistically, for instance, by seizing upon an insured’s breach which has not caused it any loss or by refusing to pay a claim or unjustly reducing the amount of a claim. Noting this, the substantive effect of s 54 was consistent with the Notification Clause on its proper construction, rendering it unnecessary to consider unfairness as it relates to that section.[6]

The Court found that even if this conclusion was wrong, s 54 would operate to ensure Auto & General’s powers to refuse or reduce claims would not cause a significant imbalance between the rights and obligations of the parties.[7]

Turning to the second limb of s 12BG(1), Auto & General discharged its onus of proving that the Notification Clause was reasonably necessary to protect its legitimate interests. Jackman J reached this conclusion by characterising the insurer’s legitimate interests as the risks it will insure against and being able to cancel a policy if it becomes aware that it is outside the risks it is willing to accept. Noting this, the requirement under the Notification Clause that the insured disclose changes to any information previously provided to Auto & General was held to be proportionate to protecting its legitimate interests.[8]

In relation to the third criteria in s 12BG(1), his Honour accepted ASIC’s argument that any reliance upon the Notification Clause by Auto & General will necessarily be detrimental to the insured, irrespective of whether its rights are limited by ss 54 or 55.[9]

Did the impugned term lack transparency?

His Honour turned to the transparency of the Notification Clause, a factor which ASIC put at the forefront of its submissions, which required consideration of ss 12BG(2)(b) and 12BG(3). The concept of ‘transparent’ involves considering whether a term is expressed in a manner which allows consumers to readily know and understand the parties’ rights and obligations. In this regard, his Honour found that the Notification Clause significantly lacked transparency.

His Honour stated that “transparency is not an independent element of unfairness as defined in s 12BG(1)”[10] and, accordingly, must be considered within the context of the three criteria within that section. As the High Court expressed in Karpik v Carnival plc [2023] HCA 39; (2023) 98 ALJR 45, “the greater the imbalance or detriment inherent in the term, the greater the need for the term to be expressed and presented clearly.”[11] As there was no “significant imbalance in the parties’ rights and obligations arising under the contract,”[12] Jackman J held that the term’s lack of transparency would not lead to a different conclusion regarding its unfairness.

ASIC was, however, successful in submitting that the uncertainty or unintelligibility of a term causes detriment to a consumer’s rights and obligations within the meaning of s 12BG(1)(c).

Takeaways for insurers

Subject to any appeal, Auto & General’s successful defence shows that common policy conditions such as the one in this case are capable of withstanding scrutiny under the UCT regime. This is a relief for the industry. Nonetheless, the decision should remind insurers to exercise caution when drafting insurance policies. The decision comes as ASIC enhances its “consumer protection focus on unfair contract terms in insurance contracts,” according to ASIC Deputy Chair Sarah Court.[13]

Furthermore, when drafting claims conditions, insurers must be cautious not to engage in misleading and deceptive conduct. While ASIC did not plead this claim under s 12DA of the  ASIC Act, its submissions that Auto & General were likely to mislead insureds as to the nature of their rights and obligations under the contract points to this possibility in the future.

The decision also provides some welcome clarification, subject to any appeal, on the interaction between the UCT regime and the ICA.  Jackman J remarked that clauses in insurance contracts must be construed by reference to the insurer’s duty to exercise its rights and powers with the utmost good faith. As this duty is what Jackman J described as a “paramount provision,”[14] such a construction should, in his Honour’s view, necessarily precede the consideration of whether a term is unfair under the UCT regime.

Finally, Jackman J appeared to suggest that terms within insurance contracts that would ordinarily be regarded as unfair under the UCT regime may be rescued by the operation of ss 13 and 54.[15] While this calls into question whether insurers could ever be liable for a breach of the UCT regime, and was one of the reasons insurance contracts were initially exempt, insurers should in any event be careful not to treat the ICA provisions as statutory ‘safe harbours’ from liability under the UCT regime. It is important to adopt good drafting practices to reduce the risk of breaching the UCT provisions now that a breach can be subject to civil penalties, and also to ensure products are consumer centric. Insurers should ensure their policy wordings are transparent as a lack of transparency could lead to a finding of an unfair contract term. This is important considering ASIC’s recent focus on consumer protection within the insurance space.

[1] ASIC v Auto & General Insurance Company Limited [2024] FCA 272 (‘Auto & General’) at [1].

[2] Ibid at [9].

[3] Ibid at [64].

[4] Ibid at [80].

[5] Ibid at [41].

[6] Ibid at [82].

[7] Ibid at [85].

[8] Ibid at [92].

[9] Ibid at [97].

[10] Ibid at [104].

[11] Ibid at [107]; Karpik v Carnival plc [2023] HCA 39; (2023) 98 ALJR 45 at [32].

[12] Auto & General at [107].

[13] Australian Securities and Investments Commission, ‘Federal Court finds Auto & General Insurance Company did not include an unfair contract term in its insurance contracts’ <> (Web page, 22 March 2024).

[14] Ibid at [60].

[15] Ibid at [81]-[82].